Editor’s note: In December 2020, DBS Bank — the largest bank in Southeast Asia — became one of the first traditional financial institutions in the world to offer cryptocurrency trading and custody services. DBS was also behind the launch of a first-of-its-kind blockchain platform for cross-border settlements. In an excerpt from DBS’ latest annual report, CEO Piyush Gupta shares his thoughts on where the digital economy is headed next.
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Let me parse the question of digital currencies into the following:
Are we likely to see a continued reduction in notes and coins, replaced by bits and bytes? The answer to this is a clear yes. Digital money is not a new concept, whether it be through use of credit cards or wire transfers. In fact, 97% of money in circulation is digital. With the ubiquity of the mobile phone, it is quite clear that e-wallets and electronic transfers will increasingly proliferate.
Are we likely to see privately-issued digital coins (e.g. Bitcoin) take over the role of state-backed money? The answer to this is probably no. The reason for this is that money needs to have three attributes: be a unit of account, a medium of exchange and a store of value.
Privately-issued coins find it hard to attain the first two of these. The reasons for this are several. These include a lack of ubiquity, absence of faith in the “issuer”, and large volatility in value, among others. While the technology used to issue these coins (blockchain) is indeed very powerful and does form a basis for creating immutability and transparency, the truth is that it will still be a while before the common man will universally accept this when it comes to regular monetary transactions. I also expect that regulators and politicians will be loath to give up control of monetary policy and economic management tools, and will therefore be very circumspect about letting private money grow. Having said this, I do think that private money (crypto) will continue to grow as a meaningful store of value, much like gold is today.
Are we likely to see more central bank digital currencies (CBDCs) in that case? I think this is a possibility, with 85% of central banks in the world currently studying and/or piloting CBDCs — so the direction of travel seems clear. However, my suspicion is that the use case for cross-border settlements will be more compelling than for local settlements. When thinking of local CBDCs, central banks will wrestle with a critical question: to what extent do they want to disintermediate the extant banking system, and its role in credit creation? And if they go down an “intermediated” CBDC approach (i.e. use the existing banking system for custody of retail CBDC wallets), do they achieve meaningful improvement over existing banking solutions?
Central banks are evaluating the potential impact of CBDCs on the efficacy of monetary policy, credit creation and availability, enabling greater financial inclusion, as well as the safety and stability of the financial system. We continue to stay close to these developments by participating in industry sandboxes and experimenting with the technology.
Beyond digital currencies, another key innovation that blockchain technology has enabled is Decentralized finance (DeFi), where tokenization and the use of smart contracts allow peer-to-peer financial transactions without the need for intermediaries, based on self-governance by the DeFi community. This will result in a rethink of the nature and construct of existing social and economic arrangements. I believe this creates several implications, of which three points stand out in my mind.
- The programmability of smart contracts will allow us to reimagine workflows, such as processes pertaining to settlements, anti-money laundering (AML) and know your customer (KYC). This could dramatically change the structure of back-office operations by reducing costs and boosting overall efficiency and effectiveness.
- There will be creation of new or modified roles in this alternate financial system for existing intermediaries. In this regard, we can draw parallels to the creation of the mutual fund industry, which disintermediated commercial banking, but led to the evolution of investment banking and wealth management. In the same way, I believe there will be an evolution of existing roles in the industry. There will also continue to be a role for client ownership and management of client experiences for banks.
- The intent of DeFi is to democratize finance by replacing centralized institutions, including government bodies. In my view, this is unlikely to occur. Going down this path will require humanity to confront the intractable but important question around the roles of the nation state, and its responsibility for the safety and stability of the financial system. My belief is that the nation state will still be a critical organizing principle and will not be diminished anytime soon.
We are keeping a firm pulse on these developments, and will continue to explore ways to harness its benefits and create new opportunities.